Chapter 17, Problem 17AP

To determine

The effects on reserves and the monetary base if the Fed sells $2 million of bonds to Irving the investor, who pays for the bonds with a briefcase filled with currency and to explain using T−accounts.

Concept introduction:

Bond is a debt instrument: It is liquid cash reduced the cash in cash circulation. The deposit of bank will fall.

Money supply − Money supply refers to the monetary aggregate that goes beyond monetary base including other assets also, which could be less liquid in form.

The fixed portion of deposits, the rate which is decided by the central bank, which the banks have to maintain with the central bank, is called the reserve ratio .